I confess that skepticism was my first reaction when I met the Cryptocurrencies, a globally payment method, based on technology, with any traditional banking support. How is that possible? A lot of years after my first moment, my opinion strongly differs. Actually, cryptocurrencies represent a 200 billion USD industry, disrupting the future of finance as we know it, representing an opportunity to stabilize the weird economic scenarios that we’re facing years before the pandemic crisis, and also to includes the 1,7 billion people in the world that aren’t on the financial system.
Stability of the world biggest economies due to the economic crisis are beating the odds. US are in the worst moment since 2008 financial crisis, with more than 13% of unemployment and symptoms of decreasing in more than 6% during 2020, according to the FRS. But, the pandemic it’s just the present, before that, a lot of scenarios are challenging the stability of the world economy: the Chinese-US economic conflict (in general, any Trump’s decision tickles on the world economies), the lack of power that OPEC represents today, Brexit’s future for the UK and EU, and others, are mostly political situations that represents economic instability and doesn’t allow to take some strategic decisions of the investors, but why the economic situation is related with the future of cryptocurrencies? It’s a lot, let’s see my point here.
Investopedia says that cryptocurrencies are a digital currency that is secured by cryptography, which makes it practically impossible to counterfeit. Crypto are decentralized, it means, any central or private bank or financial institution regulates. Otherwise, crypto are supported by Blockchain technology, a complex data structure grouped by blocks, that avoids the double-spend of cryptocurrencies and serve as an open book to track all the financial movements that comes from cryptocurrencies. Currently, cryptocurrencies are used for payments, value storage and global transactions. The key players into the ecosystem that recognize its potential are some of the biggest companies such as IBM and Microsoft, Central Banks from Sweden and China, Private Banks like JP Morgan and even Governments.
Cryptocurrencies represents a new normal thanks to their advantages:
Privacy, crypto are semi-anonymous transactions, that allows to protect data users
Access, 1,7 billion people doesn’t have any access to financial system. Crypto is free to use, allowed by internet and paper-free required
Efficiency, 16 billion USD yearly cost the financial movements. In crypto, transactions cost is none
Security supported by blockchain technology that allows anonymous transactions with a traceable record, allowing clearly information that defeats the odds of money laundry and fraud
Programmable Money, smart contracts based on crypto reduces administrative work.
Not let’s see some critical. In terms of financial, during the 2018, Bitcoin, the most tradable cryptocurrency, faces a 45% drop of its USD value, after a rise of 2700% of its value in 2017. The explanation of this drop was precisely the skepticism induced by important economists like Alan Greenspan, central banks and investors. Crypto is not supported by an asset, is supported by technology, and the valuation of the cryptocurrencies responds precisely to the security checks of the blockchain technology that increases every day. That’s why is disrupting the financial system. The functioning of the crypto it’s very simple in financial terms in comparison to the complicated financial market that is always looking for a hole on their regulation. Also, the regulation depends of a lot of economic and politic players, some of the times, these players has perverse incentives to self-benefit of the regulation. Crypto “self-regulation” based on technology it’s the same in the entire globe, and it’s impossible to break. Technology has no perverse incentives yet. Finally, it’s difficult to believe in Greenspan after his term on the Federal Reserve during the beginning of the 2008 financial crisis.
In terms of security, most of the skepticism of governments and financial institutions are related with possible money laundry cases, due to the anonymous nature of crypto. Blockchain technology are not perfect, and fraud and money laundry cases still are one of the risks of crypto. But, defenders of cryptocurrencies affirm that security is one of the most important elements that composes the valuation of the cryptocurrencies. In fact, the traceable transactions of cryptocurrencies allow an easy research to detect some illegal activities.
Crypto not only represents the advantages mentioned above. In a current world that are facing an economic uncertainty where a tweet of The Donald can, literally, destroy the valuation of a company, a currency, or even a country, a world where a political decision of the Chinese Politburo changes the trading rules of the entire globe, it’s very difficult for companies and governments to grow. Crypto is protected of politics, their rules are very simple, and the security increases every day. It’s probably not the reality of the next five years. However, I’m sure that on the new normal that we’re facing, crypto represents an opportunity to evolve on a long term into a fair, simple, stable and secure financial system.